From WorldCom, an Amazing View of aBloated Industry

[Dave Farber <dave () farber net>]

I asked Gerry , former Chief Economist of the FCC for his reaction prior to
sending this to IP. Djf

------ Forwarded Message
From: "Faulhaber, Gerald" <faulhabe () wharton upenn edu>
Date: Sun, 16 Mar 2003 11:51:34 -0500
To: Dave Farber <dave () farber net>
Subject: RE: NYTimes.com Article: From WorldCom, an Amazing View of aBloated
Industry

I am in complete agreement with this article.  While Worldcom (and the rest
of the LD firms) may have *paid* for the physical assets, it can only
*collect* the market value of those assets, which value depends upon other
assets available in the market.  If *everyone* bought tons of LD equipment
in the telecom bubble (which they did) then the market value of that
equipment will approach zero, as price is driven down toward marginal cost.

Simply because you paid a lot for it doesn't mean you can recover those
costs; if there is overcapacity, then the *market* value of those assets
will be less than the costs incurred, perhaps close to zero.  Buying lots of
physical assets while others are doing the same is a recipe for disaster,
which is why we call it the telecom bubble.

Even worse, the RBOCs are getting 271 approvals to enter the LD market,
which will drive prices down even further.  The price of LD is getting
ridiculously low.  Even worse, the wireline LD firms (including RBOCs) are
now ocmpeting against *free* LD from wireless companies.

Econ 101, Dave.  That's why they call it the dismal science;-)

Gerry

-----Original Message-----
From: Dave Farber [mailto:dave () farber net]
Sent: Sunday, March 16, 2003 9:04 AM
To: Faulhaber, Gerald
Subject: FW: NYTimes.com Article: From WorldCom, an Amazing View of
aBloated Industry


is this economic nonsense? The write-down of equipment value indicating
overpaid?

------ Forwarded Message
From: dave () farber net
Reply-To: dave () farber net
Date: Sun, 16 Mar 2003 08:47:50 -0500 (EST)
To: dave () farber net
Subject: NYTimes.com Article: From WorldCom, an Amazing View of a Bloated
Industry

This article from NYTimes.com
has been sent to you by dave () farber net.



> From WorldCom, an Amazing View of a Bloated Industry

March 16, 2003
By GRETCHEN MORGENSON




 


EVER since WorldCom toppled into bankruptcy last summer,
the company has been teaching stunned investors one lesson
after another. Not only have we learned how easy it is to
cook up a monumental accounting scandal, but our eyes have
also been opened to the special treatment that WorldCom's
executives received - in the form of hot stock issues -
from Wall Street during the bubble. And who could forget
the picture of gullible Wall Street analysts cheering
investors into the company even as it was flaming out?

But last week's WorldCom tutorial may beat all the others.
Thanks to its announcement on Thursday, we now know in
actual, quantifiable, stupefying terms, just how much
WorldCom overpaid for the telecommunications network it
built. 

After reviewing its books, WorldCom said that it would
write down the value of its assets by $80 billion. Some of
this had been expected; $45 billion in good will at the
company - largely a result of overpaying for acquisitions -
surely had little value.

But more than a few jaws dropped when WorldCom noted that
it would write down the value of its property, plant and
equipment and other intangible assets to $10 billion from
$44.8 billion. That meant that WorldCom's hard assets,
including its network, are now worth almost 75 percent less
than what they had cost. And don't forget, these assets
were bought with actual cash, not highflying shares.

So WorldCom paid $1 for assets that are now worth 25 cents.
At last we know how gross was the misallocation of capital
in the telecommunications industry in the late 90's. And
how deep is the telechasm.

While some investors may want to conclude that vanishing
asset values are peculiar to WorldCom, it is not so. Yes,
WorldCom is a company in distress, and it wants to be
extra-conservative with its books before it starts life
over again, post-bankruptcy. But because WorldCom was not
alone in building an ambitious network, its hard-asset
writedown has implications for others in the
telecommunications industry and the nation's economy over
all. 

First, the writedown is a signal that others may follow
from WorldCom competitors. "Who's next?" asked one former
telecommunications analyst. "Any of the big spenders who
put in next-generation networks are going to have to go
through the same sorts of tests that WorldCom did." AT&T,
for example, is a prime candidate.

> From a broader perspective, the deflation in WorldCom's
assets also indicates that a rebound in telecommunications
spending is further off than the optimists think.
WorldCom's announcement also spells continued trouble for
makers of telecommunications equipment, like Cisco Systems,
Lucent Technologies and Nortel Networks. When customer
demand for these goods returns, these outfits will face
severe pricing pressure from survivors who understand how
inflated prices used to be.

Of course, companies that are not operating in bankruptcy
do not need to reduce the value of their assets by the same
amount as WorldCom has done. But one can make a case that a
writedown half the size of WorldCom's - say 40 percent - is
realistic. 

Another former telecommunications analyst said: "It clearly
shows that the remaining companies' true economic value is
well, well below where their book values are, even for hard
assets and forgetting the good will. And if true economic
value is far below that, then stock prices will likely come
down." 

Thanks to WorldCom, we are closer to knowing how much
demonstrably dumb money went into the telecom industry at
the century's end. Although this particular bubble burst
years ago, WorldCom's news from last week reveals just how
long it will take to come back into balance. 


http://www.nytimes.com/2003/03/16/business/yourmoney/16WATC.html?ex=10488224
70&ei=1&en=3b2ff8787f09925c



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